Short-Term Trading: Friday Momentum | Trading Strategy (Filter)

I. Trading Strategy

Developer: Joe Krutsinger: “One Night Stand” Trading System. Concept: Short-term trading strategy based on a weekday filter and price momentum. Source:  Freeburg, N. F. (Sep. 1994). Formula Research, Quantitative Treatment of the Financial Markets. Memphis, TN: Formula Research, Inc. Research Goal: Performance verification of the short-term trading strategy. Specification: Table 1. Results: Figure 1-3. Trade Entry: Long Trades: An entry can take place only on a Friday. A buy stop is placed one tick above the highest high of the last four days if the 10-day simple moving average of the close is above the 40-day simple moving average. Short Trades: An entry can take place only on a Friday. A sell stop is placed one tick below the lowest low of the last eight days if the 10-day simple moving average of the close is below the 40-day simple moving average. Trade Exit: Exit on the next day’s open, normally Monday. Portfolio: 42 futures markets from four major market sectors (commodities, currencies, interest rates, and equity indexes). Data: 35 years since 1980. Testing Platform: MATLAB®.

II. Sensitivity Test

All 3-D charts are followed by 2-D contour charts for Profit Factor, Sharpe Ratio, Ulcer Performance Index, CAGR, Maximum Drawdown, Percent Profitable Trades, and Avg. Win / Avg. Loss Ratio. The final picture shows sensitivity of Equity Curve.

Tested Variables: Slow_MA_Look_Back & Long_Entry_Look_Back (Definitions in Table 1):

Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).

STRATEGY	SPECIFICATION	PARAMETERS
Auxiliary Variables:	SlowMA(Slow_MA_Look_Back) is the simple moving average of the close price over a period of Slow_MA_Look_Back. FastMA(Fast_MA_Look_Back) is the simple moving average of the close price over a period of Fast_MA_Look_Back. HighestHigh (Long_Entry_Look_Back) is the highest high over a period of Long_Entry_Look_Back. LowestLow (Short_Entry_Look_Back) is the lowest low over a period of Short_Entry_Look_Back.	Slow_MA_Look_Back = [20, 80], Step = 2; Fast_MA_Look_Back = 0.25×(Slow_MA_Look_Back); Long_Entry_Look_Back = [1, 30], Step = 1; Short_Entry_Look_Back = 2.0×(Long_Entry_Look_Back);
Setup:	Long Trades: FastMA(Fast_MA_Look_Back) > SlowMA(Slow_MA_Look_Back). Short Trades: FastMA(Fast_MA_Look_Back) < SlowMA(Slow_MA_Look_Back).
Filter:	An entry can take place only on a Friday.
Entry:	Long Trades: A buy stop is placed one tick above the HighestHigh[i – 1]. Short Trades: A sell stop is placed one tick below the LowestLow[i – 1]. Index: i ~ Current Bar. Note: In the original “One Night Stand” trading system, buy stops are placed at the HighestHigh[i – 1] and sell stops are placed at the LowestLow[i – 1]. When entry stops are one tick away from these price thresholds (our entry rules), absolute and risk adjusted returns are significantly improved.
Exit:	Time Exit: Exit on the next day’s open, normally Monday. Stop Loss Exit: ATR(ATR_Length) is the Average True Range over a period of ATR_Length. ATR_Stop is a multiple of ATR(ATR_Length). Long Trades: A sell stop is placed at [Entry − ATR(ATR_Length) * ATR_Stop]. Short Trades: A buy stop is placed at [Entry + ATR(ATR_Length) * ATR_Stop]. Stop Loss Exit is used to normalize risk via position sizing.	ATR_Length = 20; ATR_Stop = 6;
Sensitivity Test:	Slow_MA_Look_Back = [20, 80], Step = 2 Fast_MA_Look_Back = 0.25×(Slow_MA_Look_Back) Long_Entry_Look_Back = [1, 30], Step = 1 Short_Entry_Look_Back = 2.0×(Long_Entry_Look_Back)
Position Sizing:	Initial_Capital = $1,000,000 Fixed_Fractional = 1% (Figure 1-2) Fixed_$_Risk = $10,000 per trade (Figure 3) Portfolio = 42 US Futures ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20
Data:	42 futures markets; 35 years (1980/01/01−2015/3/31).

Table 1 | Specification of Trading Strategy.

III. Sensitivity Test with Commission & Slippage

Tested Variables: Slow_MA_Look_Back & Long_Entry_Look_Back (Definitions in Table 1):

Figure 2 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $50 Round Turn).

IV. Market Groups

Parameters: Default values for “One Night Stand” trading system. Position sizing: Fixed dollar risk per trade ($10k) volatility adjusted (i.e. no compounding in a group analysis).

Figure 3 | Market Groups (Inputs: Table 1; Commission & Slippage: $10-$50 Round Turn (RT)).

V. Rating: Short-Term Trading with Friday Momentum | Trading Strategy

A/B/C/D

VI. Summary

Since 1993, the trading strategy stopped working across all major market groups once the realistic cost of trading is applied (Figure 2-3). Without the cost of trading, the strategy holds (Figure 1).

Related Entries: ORBP Trend (Filter & Exit) | ORBP Counter-Trend (Filter & Exit)
Related Topics: (Public) Trading Strategies

CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

RISK DISCLOSURE: U.S. GOVERNMENT REQUIRED DISCLAIMER | CFTC RULE 4.41

Codes: matlab/krutsinger/one-night-stand/